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Is Digital Realty Planning to Buy Data-Center Firm Ascenty?


Digital Realty Trust, Inc. DLR is in discussion to acquire data-center firm Ascenty in Brazil, according to Bloomberg news. The company might make investment in Ascenty in conjunction with a joint venture partner.

If the buyout of Ascenty materializes, which is presently owned by Great Hill Partners and a Blackstone fund, it will be a strategic fit for Digital Realty. The Brazilian data center firm has eight data centers in operation and six more in construction.

Currently, its data centers are located in Sao Paulo, Rio de Janeiro and Ceara. These are connected to a fiber optic network, spanning more than 4,500 km. Valued at more than $1 billion, Ascenty has a superior infrastructure, with redundancy, security and high connectivity, enabling it to have contracts with clients like Oracle Corp., Amazon.com Inc. AMZN and Facebook Inc. FB.

Notably, data-center REITs are expected to continue experiencing a boom market with growth in cloud computing, Internet of Things and big data, and an increasing number of companies opting for third-party IT infrastructure. Also, the estimated growth rates for the artificial intelligence, autonomous vehicle and virtual/augmented reality markets will remain robust over the next five-eight years. These factors, along with an improved outlook for economic growth, are anticipated to provide substantial growth impetus to data-center REITs, including Digital Realty, Equinix, Inc. EQIX, and others.

Specifically, Digital Realty is poised to benefit from strong demand for data centers through accretive acquisitions and development efforts. In September 2017, Digital Realty declared the completion of a merger with DuPont Fabros in an all-stock deal, for an enterprise value of about $7.8 billion. This move enhanced the company’s portfolio in the top U.S. data center metro areas across Northern Virginia, Chicago and Silicon Valley. It helped it to enhance hyper-scale product offering and grow its blue-chip customer base.

Moreover, the company acquired Telx in October 2015 and a portfolio of 8 high-quality, carrier-neutral data centers in Europe (Amsterdam, Frankfurt and London) from Equinix in July 2016. Such acquisitions offered a leading colocation and interconnection platform, superior connectivity infrastructure and better scope for growth in attractive locations. Also, it enhanced its presence in Europe, Australia and Asia in the recent years through the development of high-quality facilities. We believe that such expansion efforts would drive the company’s top and bottom lines in the years ahead.

However, Digital Realty faces intense competition in the industry. Aggressive pricing pressure is also likely to continue in the upcoming period. Furthermore, it has a substantial debt burden, hence, rate hike adds to its woes.

Currently, Digital Realty has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The stock has rallied 6% over the past month compared with the industry’s growth of 2.7%.

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